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HFT 2401
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  1. HFT 2401 Chapter 4 The Accounting Cycle

  2. 1) Analyzing Transactions 2) Journalizing Transactions 3) Posting 4) Prepare a Trial Balance 5) Prepare Adjusting Entries 6) Post Adjusting entries 7) Prepare an Adjusted Trial Balance 8) Prepare the Financial Statements 9) Record and Post Closing Entries 10) Prepare a Post-closing Trial Balance 10 Basic Steps to the Accounting Cycle

  3. Adjusting Entries • Initial trial balance is prepared from daily business transactions • Adjusting entries are prepared and recorded • An adjusted trial balance is prepared to assure balancing of debits and credits

  4. Adjusted Trial Balance • The adjusted trial balance is used to prepare the income statement and balance sheet • Income statement – revenues and expenses • Balance sheet – changes in assets and liabilities • Net Income (Loss) – Flow to owners equity

  5. Statement of Owners Equity • A financial statement that summarizes transactions affecting the owners capital account • Owners Equity (Beginning of Period) • Plus: Net Income for the Period • Less: Net Loss for the Period • Less: Owners Withdrawal for the Period • Balance: Current Owners Equity for the Period

  6. Closing Entries • Revenue and expenses are called nominal accounts, as they are sub-classifications of the owners equity account • Once the financial statements are prepared, the balances in the nominal accounts are cleared to zero and transferred to owners equity • These accounts are closed by recording closing entries in the general journal & then posting them to the general ledger

  7. Closing Entries • Revenues and expenses are closed to a temporary clearing account known as Income Summary • The net balance of the Income Summary account is determined and then transferred to the Owner’s Equity account • The Owner’s Drawing account is also closed to Equity, but directly, not through Income Summary

  8. Three Basic Steps to the Closing Process • 1) Close the revenue and expense accounts to the Income Summary account • 2) Close the Income Summary to the Owner’s Equity account • 3) Close the Owner’s Draw to the Owner’s Equity account

  9. Closing Worksheet • Columnar accounting paper that lists all accounts, initial trial balance, adjusting entries and closing trial balance • Process • Prepare the trial balance • Post the adjustments • Prepare the adjusted trial balance • Segregate the adjusted column balances into columns for preparing the balance sheet and income statement • Determine the net income (loss) for the period) • See Exhibit 8 on page 118 for an example

  10. Reversing Entries • Used to record accruals / deferrals in an accounting period • Usually affects expense accounts and current liability accounts (i.e. Accounts Payable, Accrued Wages) • These entries are reversed at the beginning of the next accounting period • Most computer accounting systems will post reversals automatically

  11. Homework Assignment • Problem 2 • Problem 5 • Part 2 only. Format as shown in Exhibit 8 on page 118 • Problem 7